Well, that was interesting.
Every presidential election in the United States, regardless of the outcome, offers something to be intrigued by.
2024 was no different.
I have spent much of my career studying human decision-making and behavior, especially when we engage in herd behavior. This election provided some lessons for those who were paying attention.
Investing and politics don’t mix.
I have been saying this for as long as I can remember, yet people continue to make the same error. It was literally the headline of my very first Washington Post column back on February 6, 2011: “Why politics and investing don’t mix” (Paywall free version: Big Picture)
The financial media spent a lot of time—way too much, in my opinion—covering the election. This focus can lead investors to make unwise changes in their portfolios. (I have two chapters on this in “How Not to Invest.”)
Politics is emotionally driven, and that is the bane of good investing.
Forecasts LOL (predictive polling fail)
People do love Predictions & Forecasts, even though we suck at making them. This includes polling, abused as they are as a forecast of what will occur on election day.
Start with the “Hypothetical Bias,” and then add an inability to reach a representative group of people. These combine to give us polling’s terrible track record. We still can’t quit them, can we?
How many times must they be wrong before people stop relying on them? Research shows they are worse than terrible a year out— as often as not that far in advance, polling focuses on the wrong candidates (2008; 2016; 2024). As discussed previously, polls are completely lacking in predictive value one year out, six months ahead of elections, three months before voting (even two weeks before). 7-to-10 days before election day is where they seem to have a modest degree of accuracy.
Polls blew it in 2016, 2018, 2020, 2022, and now again in 2024. Just because numbers are involved does not mean that polling is the same as solid data. Aggregating bad numbers just gives you an average of bad numbers. Investors should be similarly wary of any mechanism making claiming to accurately forecast the future.
Narratives dominate
It’s deadlocked, with a razor-thin margin. This is a turnout election, and 2024 is the year of the woman voter.
We love narratives despite the fact that nearly all of the dominant ones failed to prove true; the narratives that got it right were due to chance as much as anything. But we cannot help but get suckered in by a good story, for that is our nature.
Your filter bubble
We all live in a happy little bubble, driven by many factors: Where we live, who our friends are, the media we consume, and even our family upbringing affect the bubble.
It’s challenging to operate outside of the bubble. To succeed you must make a purposeful effort to consume content that you disagree with or to recognize when you are engaging in selective perception and confirmation bias.
Perhaps the most insightful observation I heard from somebody on the losing side of this election was this: “I guess there are a lot fewer people like me than I previously realized.” That’s a smart acknowledgment that your own bubble does not reflect the broader electorate.
It’s not merely the news you consume but the totality of your daily life that creates a unique perspective. Whether you are a farmer, a blue-collar worker, a creator, or a finance bro, most people in the country have very different experiences than you.
Consider how your bubble affects everything you do, including deploying capital.
Sentiment is hard to measure
My experiences have been that Sentiment is not especially accurate or useful. When it reaches an extreme, it contains important market signals, but that’s only 1% of the time; the other 99% contains little information.*
Worse still, it has become increasingly difficult to measure sentiment today. It’s not just that people are so difficult to reach. As a country, we have become more partisan and performative. Even the University of Michigan sentiment readings have become increasingly unreliable. (I wonder how many people troll economic surveys and pollsters.)
Media Coverage is Misfocused
The U.S. media is really good at covering sports. Football is great on TV. As much as I love going to New York Knicks games, television broadcast brings you the action up close and personal in a way that even courtside seats cannot.
Sports are the ultimate narrative: Competitors in the arena with heroes and goats, winners and losers, and an easily measurable scorecard.
The media is much better at covering sports contests than elections, so the default methodology is to treat elections like games. Hence, the endless focus on the contest, and the lack of focus on issues.
The parallels to financial media are obvious: The focus is on the temporary and short-term rather than the more complex and long-term. Issues that are more challenging to cover and require expertise to explain are mostly ignored.
Your attention is misplaced
Here’s what didn’t matter: The Vice-Presidential candidates, any of the debates, Trump’s Legal Troubles, Climate Change, Transgender Rights.
Here’s what did matter: Inflation and The Economy (consistently mentioned by voters as their top issue), Abortion rights, and Immigration. Everything else was noise.
Speculation is rampant
The simple truth is that every cable channel I watched, from Fox News to MSNBC, CBS to CNBC, and Bloomberg, spent most of its election coverage over the prior six months engaging in speculation and opinion.
This is fine so long as you understand what it is: I treat it somewhere between idle gossip and the chatter of sports fans. It’s not useful – it’s not even news – it’s simply entertainment.
Nobody knows anything
You might have noticed a pattern: Humans are simply terrible at forecasting the future. And, we don’t really understand the present.
It doesn’t matter the field: Movies, music, politics, the economy, and most especially markets. We spend way too much time imagining we know what comes next when our track records clearly reveal we have no idea what is going to happen.
The world is filled with randomness. Making a guess 6 to 12 months ahead of time gives the universe ample opportunity to throw a curveball your way.
There is a famous Yiddish proverb: “Der Mensch Tracht, Un Gott Lacht.” It translates simply as “Man Plans and God laughs.”
Humility is in Short Supply:
Wall Street suffers from a scarcity of humility. This is another chapter from “How Not to Invest.”
We know less than we think we do, and we act recklessly despite our ignorance. Those who pretend otherwise are usually selling something.
We do not know what the future will bring. We have only a rough understanding of the past (which occasionally can be useful for extrapolating forward) and little understanding of the present. We assume the future will look like the past, which it often does not.
Good money management requires a certain humble quality that is quite rare in the field of finance. By now, you should be familiar with how all of these bad behaviors lead to poor outcomes.
You must ask yourself, “What don’t I know?” Make that self-inquiry frequently.
Not to play Cassandra, but we discussed all of these topics repeatedly over the past year. It feels like we go through this exercise every election. (Here is 2016’s version).
To quote German philosopher Georg Hegel, “The only thing that we learn from history is that we learn nothing from history.”
Previously:
Who’s Gonna Win? (November 5, 2024)
Where Might Consensus Be Wrong? (October 29, 2024)
Bad Polling is a Behavioral Problem (October 6, 2024)
Another Reason Why Polling is So Bad (August 15, 2024)
Nobody Knows Anything, 2023 Polling Edition (November 8, 2023)
Is Partisanship Driving Consumer Sentiment? (August 9, 2022)
Lessons for Investors from Trump’s Upset Victory (November 9, 2016)
__________
* Perhaps 1% is an exaggeration, but I sincerely doubt there is much information 80-90% of the time, when sentiment is in the middle of its range.
Preorder “How Not To Invest: The ideas, numbers, and behaviors that destroy wealth – and how to avoid them.”
